The Tennessean

Millions of dollars in public funds and unsurpassed on-ice success have not been able to turn the Nashville Predators into a profitable business.

The leader of the local ownership group said members have been forced to put $60 million of their own money into the operation over the past five years, largely to cover losses. The city has given the Predators $38.6 million in the same period.

With the financial failures of other Sun Belt professional hockey teams in Dallas, Atlanta and Phoenix, the question then becomes: Is the Predators’ business model sustainable?

And how helpful is a playoff run in building the kind of loyal fan base that sustains the more financially successful Northern teams?

Little detail is known about the finances of most professional hockey teams because they, like many other sports teams that receive public dollars, do not share financial statements with their government partners and taxpayers.

When a failure emerges — such as the bankruptcy of the Phoenix Coyotes in 2009 with $80 million in debt — details do come to light. In the three years before bankruptcy, that team’s owner said, he lost $73 million.

As the Predators and the Coyotes square off for Game 2 today in the Western Conference semifinals, both teams benefit from fan momentum at a critical time.

The National Hockey League bought the Coyotes out of bankruptcy and is now trying to sell the team, possibly to a group of local Arizona investors.

Likewise, Tom Cigarran, who chairs the Predators ownership group, said his group is hunting for additional investors willing to kick in $15 million to $25 million.

Cigarran, citing improved attendance and other business accomplishments, predicted the Predators will turn the corner soon on profitability.

And the city of Nashville has indicated it is willing to continue its public funding. Since 1997, Metro and the state have given the hockey team $107.8 million through a contract that has been renegotiated once with more generous incentives.

It is common for cities to provide financial assistance to sports teams with the idea that it will boost the local economy. Many cities, including Nashville, pay to build hockey arenas. But most limit their funding to paying debt on the buildings and capital improvements.

Nashville’s contract goes beyond that, paying the Predators to operate the arena, providing financial incentives to book non-hockey events and covering most of any losses associated with running the building. And the state kicks in some tax dollars, too.

The Predators received $11.62 million last year in state and city money.

Nashville Mayor Karl Dean’s office said it is confident in the Predators’ stability, but other Metro officials expressed concern that the owners say the team is still not profitable.

“It concerns me that a business we have invested so much money in, and so much of our brand as a city, for the operation to tell us that they’re not making any money,” said Steve North, a board member of the Metro Sports Authority, the landlord at the arena. “It frightens me that the lessee … can’t make money.”

Cigarran said the team’s business operations are pointed in the right direction. Attendance at hockey games has steadily increased from an average 14,000 tickets sold per game two years ago to 16,200 this year. That includes 25 sellouts in the regular season alone this year, compared with four sellouts two years ago.

Predators CEO Jeff Cogen said revenue from private sponsorships at the arena — another important benchmark of success for sports franchises — is up about 25 percent since he and Chief Operating Officer Sean Henry were hired in 2010. Cogen would not disclose the number of sponsors or how much revenue they generate.

Television ratings have been improving, as well. The team averaged a 0.4 rating for local broadcasts last season, and has seen the rating grow to 1.0 this year, said Predators spokesman Gerry Helper.

The improved ratings, which equate to about 10,000 fans watching each broadcast, are important as a demonstration of the level of the fan base.

Local ratings for hockey broadcasts vary greatly among NHL markets. Pittsburgh led the way last year with an 8.68 local rating for Penguins broadcasts, while the Florida Panthers, who play in south Florida, were last with a 0.16 rating.

However, Vanderbilt University economics professor John Vrooman, who specializes in sports business, pointed out that the NHL’s business model is not built around broadcast revenue.

“The national television presence of the NHL is weak compared to the rest of the big four,” Vrooman said.

Part stimulus investment

One of the important sources of revenue for the less-successful hockey teams is the NHL’s revenue-sharing arrangement.

According to ESPN.com, the bottom 15 revenue-earning teams received up to $18 million in revenue sharing. The Predators acknowledged that they benefit from revenue sharing but would not disclose how much.

Another important source of money for the team is subsidies and fees from the city and state.

Dean has said that Metro intends, in a new deal being negotiated, to offer the Predators more incentive-based dollars and less guaranteed money. Cigarran said the team must receive city support near its current $7.8 million figure. In addition to that money, the Predators receive money generated through state sales and privilege taxes, which vary based on volume but totaled $3.82 million last year.

“So we can’t not have the ability to get approximately what we have been getting and still be viable in the long run,” Cigarran said.

Dean’s office views the subsidy of the Predators as one part necessary expense to operate the arena and one part worthwhile investment to stimulate business for bars and restaurants on Lower Broadway. In 2004-05 when a labor stoppage canceled the entire hockey season, it still cost Metro $5 million to operate the arena. City officials view that price tag as the baseline for what they must spend on the building annually, even if there isn’t an anchor tenant like the Predators.

“The Predators and arena are an important part of our downtown’s vibrancy and our city’s economic vitality,” Dean’s spokeswoman Bonna Johnson said. “The Predators do a great job at bringing thousands of people downtown on a regular basis and have a positive impact on Nashville.”

The economic impact of the Predators’ games was measured in a recent study commissioned and paid for by the team, showing the hockey team and arena generated an annual impact of $410 million through job creation and downtown spending. According to the study, Bridgestone Arena events such as hockey games and concerts generate $91 million each year in fan spending at other establishments downtown.

The money from the city includes a $1.8 million fee for Powers Management, a separate entity owned by the Predators owners, to operate Bridgestone Arena. This involves booking and handling non-hockey events such as concerts and basketball games.

The financial results of arena operations are public record and show increasing losses from $5.1 million in fiscal year 2010 to $6 million in 2011, according to audited financials provided to the Sports Authority. The city agreed in its contract with Powers Management to reimburse Powers for some operational losses of the arena. This year, the amount budgeted is $4.1 million.

The arena losses have raised questions for some council members and Metro officials. But others see the expense as an investment because it stimulates the downtown economy and generates tax revenue that the city wouldn’t have otherwise.

In 2011, Bridgestone Arena hosted 140 hockey games, concerts, basketball games and other entertainment events, up from 136 the year before.

Many of these events do not break even and ultimately lose money for arena operations, but the city is willing to trade a loss on those events in exchange for the tax revenue generated by fan spending outside of the building.

Predators and Powers Management accept a loss because they receive separate tax incentives from the state to help their bottom line.

The city is discussing new more incentive-based lease terms that would encourage Powers Management to book more non-hockey events.

“If the council decides to offer incentives to the team, it needs to be under the agreement that Nashville has access to their audited financials,” Metro Councilman Josh Stites said. “I guarantee no other team investor has invested so much without seeing the team’s financials; why should we be any different?”

As for the Predators’ current playoff run, Henry said it would help the team’s balance sheet, though not as much as postseason success once did. Before the existing collective bargaining agreement, teams were able to keep 100 percent of playoff profits, but now a large percentage is sent to the league to be included in overall revenue sharing.

Henry said deep playoff runs do help the community feel more invested in the team and therefore improve season ticket sales.

But Vrooman said the Predators still stood to pocket hundreds of thousands of dollars per playoff home game, and the team owed it to the public to prove it is still losing money despite the extra revenue.

“On top of player cost certainty and busting into the second round of the playoffs, the Preds already have what is widely held as the best, most lucrative arena lease in the league,” Vrooman said. “If the Preds are crying poverty now, then Smashville probably needs to see the proof.”

Many sports teams do not share their financial information with the cities that are providing public funding, which has been a sticking point in other pro sports markets. A Minnesota state senator recently said the NFL’s Vikings, who are seeking public financing to build a new stadium, should disclose their finances.

There also have been instances of professional sports franchises misleading the public regarding their profitability. Most recently, the Florida Marlins, who were lobbying the city of Miami for a new stadium, said they needed help because they weren’t turning a profit. But financial documents were later leaked to the media, and showed the team was making millions.

Henry, the Predators’ chief operating officer, contends the team already gives a lot of financial information to Metro government, and Cigarran said the ownership group deserves to keep its business dealings private.

Lack of history hurts

To get on better financial footing, the Predators may have their work cut out for them.

At the other end of the spectrum, the St. Louis Blues have proved hockey can succeed in an unconventional market. The Blues have played in baseball-crazy St. Louis since 1967 and are on the brink of being sold to a local investor for about $180 million, according to the St. Louis Post-Dispatch.

Vrooman said team markets like Nashville, without a long history of professional hockey in general, are at a disadvantage because it’s more difficult for the teams to maintain fans when they have losing seasons.

“The problem is that Sun Belt demand for hockey depends on the teams winning while the traditional markets (like Detroit, Chicago and Boston) had a fixed and rabid clientele,” Vrooman said.

The upcoming collective bargaining agreement negotiations with the NHL players union will be important to the Predators’ future. The central questions will be how much revenue does the league split with players and how much do large-market teams in Toronto, Boston and Chicago share with small-market teams like Nashville.

“All the things that are being talked about, and we cannot talk about anything specifically by edict, are positive,” Cigarran said. “For the nontraditional markets in particular, it will be helpful to us to thrive in the future, and for the league to thrive.”

Picture 'very different'

One pitfall of small-market teams over the years has been unstable ownership groups. The Predators owners have managed to keep quiet some squabbles within their own ranks, namely forcing former lead owner David Freeman to surrender control of the ownership group’s five-member board of directors.

Freeman, who spearheaded the purchase of the team in 2007 to prevent it from being sold to a Canadian businessman intent on moving the Predators out of Nashville, remains a member of the ownership group. But he lost the leadership role in 2010 after it was revealed that he had a federal tax lien stemming from a still-unresolved dispute with the IRS. Cigarran now leads the board that makes operational decisions for the Predators and Powers Management.

Cigarran said all business decisions are collaborative among the owners, none of whom are currently seeking to sell their shares in the team.

Cigarran downplayed the change in chairman, saying the move came so Freeman could concentrate on his personal matters.

“The present owners have probably put in a lot more than they wanted to, but are still capable of doing it,” Cigarran said. “Second thing, things are getting better. Even spending as much as we are presently spending and are planning to spend on player payroll, we can see a day in the not-too-distant future where we can break even.”

Of the $60 million Cigarran says local owners have contributed to the team, $15 million was to purchase the shares of former minority investor William “Boots” Del Biaggio from a bankruptcy trustee, according to federal bankruptcy filings. The Predators would not disclose what percentage of the remaining $45 million was from operating losses.

Cigarran said that when potential investors examine the Predators financials, they will see an operation that has stabilized.

“When we’re talking to them, what they’re going to see in terms of what they’re buying into is radically better,” Cigarran said. “So the risk, in terms of capital calls and continuing to have to invest, will be significantly lower. Not that it won’t happen. It could happen in any one year. Who knows what unanticipated opportunities or problems are out there? But it’s a very different financial picture than it was even two years ago.”